Compensation and Competition for Talent: Talent Scarcity or Incentives?

44 Pages Posted: 9 Jan 2013 Last revised: 25 Feb 2014

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Daniel Metzger

Stockholm School of Economics - Department of Finance; London School of Economics & Political Science (LSE) - Financial Markets Group; Swedish House of Finance

Date Written: October 27, 2013

Abstract

We show that long-term compensation is associated with higher pay in the financial industry and the legal sector. Then, using a detailed survey of law school graduates, we explore why firms use long-term compensation. We find that individuals with jobs that make them highly visible and that allow them to shift effort from tasks that are value-enhancing for the employer to tasks that are self-enhancing are more likely to receive long-term compensation, especially in markets with high competition for talent. High-ability individuals receive higher pay, but are not more likely to be awarded long-term compensation. These findings suggest that long-term compensation arises in an optimal contract, because competition for talent accentuates agency problems in the allocation of effort and may create retention problems.

Keywords: Competition for talent, retention, optimal contracts, legal labor market, financial labor market

JEL Classification: G34, J22, J31, J33, J41, J44, M52

Suggested Citation

Giannetti, Mariassunta and Metzger, Daniel, Compensation and Competition for Talent: Talent Scarcity or Incentives? (October 27, 2013). Swedish House of Finance Research Paper No. 13-06. Available at SSRN: https://ssrn.com/abstract=2197756 or http://dx.doi.org/10.2139/ssrn.2197756

Mariassunta Giannetti

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Daniel Metzger (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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